CalPERS eyes another $10bn-plus to private equity as it works towards its target

The US's largest public pension deployed $12.3bn to PE last year, its second straight year of $10bn-plus deployment.

The California Public Employees’ Retirement System wants to continue its aggressive private equity pace as it works towards its recently raised 13 percent target, after committing $12.3 billion to the asset class last year, as reported by affiliate title Private Equity International.

The $500 billion state plan has taken its private equity allocation to nearly 10 percent as of 31 December, from 6.3 percent in June 2020, according to interim chief investment officer Dan Bienvenue, speaking at the pension’s semi-annual trust review on Tuesday. The target was raised to 13 percent from 8 percent in November with the adoption of a broad asset allocation plan.

CalPERS deployed $12.3 billion in 2021 into fund interests, co-investments and other customized vehicles, the second straight year of deployment in excess of $10 billion. At the current AUM, the PE portfolio is more than $15 billion shy of its target allocation to PE.

The plan will “continually need” to deploy at this scale to achieve its allocation target, said Steve McCourt, co-chief executive of Meketa Investment Group, CalPERS’ private markets consultant.

Making commitments with “high underwriting standards and cost-advantaged economics” helped lift the allocation so swiftly, added Bienvenue. Indeed, building a robust capacity for co-investments, which are usually offered on a no-fee, no-carried interest basis, is a well-documented priority for CalPERS.

Those “cost-advantaged” opportunities could come via fund interests, co-investments and customized/separate accounts, according to a spokeswoman for the pension.

The numerator effect, when outperformance distorts the allocation relative to the rest of the investment portfolio, was also a factor in the rapid private equity exposure growth, according to Bienvenue.

CalPERS returned 39.3 percent as of 31 December over a one-year period, according to documents prepared by Meketa, beating its benchmark by 790 basis points. Fund interests returned 42.3 percent in the period, beating co-investments at 36.3 percent and customized accounts at 32.5 percent.

The PE portfolio averaged a 17.3 percent annual return on a three-year time frame, and 16.5 and 13.9 percent on a five- and a 10-year time frame, respectively.

Over the last decade the private equity performance has been “extraordinary”, according to McCourt.